Viewpoints: Environmental water market would help the losers in this drought

By Jay Lund, Ellen Hanak and Barton “Buzz” Thompson - Special to The Bee

February 02, 2014 12:00 AM

California is in a major drought, and state and federal regulators will be under pressure to loosen environmental standards that protect native fish. This happened in the 1976-77 and 1987-92 droughts, and the current drought could become much more severe.

These standards demonstrate the high value society places on the survival of native fish and wildlife. In past droughts, we have given away some of these protections because of pressure to make more water available for other uses. But this time, California can do better. We can create a special water market that meets the state’s goals of both ensuring a reliable water supply and protecting the environment. In this market, growers and cities would pay for the additional water made available from relaxed environmental standards, and the revenues would help support fish and wildlife recovery.

Typically, water trading dampens the costs of drought. Farmers irrigating high-cash crops such as almond trees can buy some water from growers of alfalfa, rice and other crops that are less profitable per drop of water used. Such trading can greatly reduce the overall economic and social costs of a drought and distribute these costs more broadly. Importantly, such market transactions ensure that those who use less water than their entitlement are compensated for the reduction. Because water buyers must pay for the added water, they also have an incentive to conserve.

Although environmental uses generally do not have water rights, river flow and water quality rules intended to protect endangered fish and wildlife from extinction are similar to very secure water entitlements. But in past droughts, state or federal decisions to relax environmental standards essentially became a gift to other water users. The shorted environmental uses were not compensated, and farmers and cities that benefited had less incentive to conserve water.

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A better approach would create a special drought environmental water market, so that those who gain from relaxed standards help compensate the losers. When standards are loosened, fish threatened with extinction may require additional expensive actions such as habitat restoration and acquisition and “conservation hatcheries,” which help maintain populations of endangered species outside of their natural environment.

Unlike past environmental water markets, where agencies only bought water for fish and wildlife refuges, some environmental flows in this special drought market would be treated as senior water rights that could be sold. Fishery agencies could sell some of these flows when they determine that the reduction will not jeopardize endangered species. The sale of this water would provide funds that help native species recover.

For example, a relaxation of environmental flow requirements that made available 100,000 acre-feet of water (1 acre-foot is about 326,000 gallons) – perhaps worth $400 an acre-foot during a drought – would generate $40 million to help pay for compensating actions. Those actions might include buying water for environmental purposes elsewhere in the state or creating a reserve fund to aid native fish after the drought.

Making this new market work would require some new rules, and there are several options. Compensated relaxation of environmental flow standards could be done as part of regulatory actions under the Endangered Species Act (biological opinions, incidental take permits and habitat conservation plans), negotiated agreements with water users or fixed penalties for violating flow and water quality standards. The price could be set at the fair market value of the water made available, the cost of compensatory environmental actions or a fixed or negotiated fee established by the regulatory agency.

Creating this type of drought environmental water market would help limit the reductions in environmental river flows, while ensuring that such reductions receive some compensation.

For California, this would be an appropriate expression of the state’s co-equal environmental and economic goals for water management in times of hardship. If we can’t all get better together in a severe drought, at least we can reduce and share the pain fairly in a way that provides some help to fish and other species that depend on our rivers for their survival.